Key takeaways
- The scarcity principle is an economic theory that says items high in demand but low in supply will increase in price.
- Under the scarcity principle, supply and demand is mismatched and price has to compensate for this discrepancy.
- The investment thesis supporting passion assets such as luxury watches, fine wine and art is rooted in the scarcity principle. While returns on these investments vary, some consistently beat traditional investment indexes, such as the S&P 500.
What does a vintage bottle of wine, a discontinued Twinkie and a Supreme T-shirt from 2006 have in common? Their surprisingly hefty price tags.
The bottle of wine in question, dating back to World War II, auctioned at 17 times the original price at $558,000 while the once discontinued Twinkie went for $5,000 a pop on Ebay. The Supreme T-Shirt, tie-dyed and considered “vintage” sold for $52,000, reiterating the brand’s cult following.
These examples demonstrate the range of applicability for the scarcity principle, an economic theory that says items high in demand but low in supply will increase in price. Investors often apply the theory when they acquire passion assets, such as art, luxury watches or jewelry and wine, all expected to appreciate over time. The investments vary in their returns but some consistently beat traditional investment indecises, such as the S&P 500.
The thrill is in the chase…and the perception
The scarcity principle is rooted in psychology. Studies have shown that when a goods or a service is perceived to be scarce, people generally want it more. This has to do with consumers believing the scarce good is also a quality good, or the scarce good is worth the chase, or both. Using marketing techniques that include buzzwords such as “limited time offer”, “limited quantity” and “while supplies last”, businesses often take advantage of this mentality.
Supply, Demand and Equilibrium (or lack thereof)
An economic understanding of the scarcity principle requires some insight into supply and demand theory, the pillar of modern economics. The theory is really made up of two separate “laws”, the law of demand and the law of supply. Under ideal conditions, the relationship between these laws is a balancing act – an over-supply of goods or services causes prices to go down, which results in higher demand, while an under-supply or shortage causes prices to go up, resulting in less demand. The two curves representing these trends on a graph are said to intersect at one specific point, where market equilibrium is achieved.
The equilibrium price is the point at which consumers and producers meet, or when supply equals demand. At this price, the amount consumers want to buy of the product – quantity demanded – is equal to the amount producers want to sell – quantity supplied.
Popular economic models dictate that markets are always moving toward equilibrium, but don’t always achieve or maintain it. Markets can be at mismatched levels of supply and demand for a variety of reasons (not factored into ideal conditions), a state known as disequilibrium until other factors compensate for the discrepancy.
Under the scarcity principle, supply and demand is at a disequilibrium and price compensates for the discrepancy (by going up) until equilibrium is achieved. When a product is scarce, consumers are often doing their own cost benefit analysis, where their perceived benefit of having the product outweighs the cost associated with obtaining it.
Invest in Art Today
Luxury pieces are often thought of as investment pieces, especially when trying to justify a particularly expensive purchase. In economic terms that’s only true if the item appreciates in value over time.
The watch industry is the most lucrative fashion example of the scarcity principle. Renowned watch brands such as Patek Philippe and Rolex consistently beat two of the most popular stock market indices, the American S&P 500 and the British FTSE 100, even after continued supply shortages that lead to long waiting times. The highest yielding watch brand has gone to Patek Philippe with a return of investment (ROI) of 207% over the past five years, followed by Audemars Piguet at 158%.
Fine wine is even more intensely dictated by the scarcity principle. Because wine quality varies seasonally and by geography, where the weather and soil conditions play a significant role, a bottle that originated in a specific year with favorable conditions can be extremely scarce. At the same time, once the wine is consumed the remaining bottles from that year become even scarcer, further driving up the value . According to Liv-Ex, a global marketplace for fine wine, the two-year return of 25.68% for fine wine has beaten returns from gold and crude oil.
The art industry is rooted in the scarcity principle, with artists creating very limited copies of their work. While it’s hard to pin down return rates for art, which vary by artist and trends for the year of sale, aggregate sales of art and antiques by dealers and auction houses were estimated at $65.1 billion in 2021, with expectations for it to grow in 2022.
Yieldstreet and passion assets
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2 Represents an average net realized internal rate of return (IRR) with respect to all matured investments in your portfolio, utilizing the effective dates and amounts to and from the investments and net of management fees and all other expenses charged to the investments. Past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. All securities involve risk and may result in significant losses, including the loss of principal invested.[read more]